More on the United Airlines pension situation

Ian Welsh has an interesting post up about the ongoing pension problems at bankrupt United Airlines. He starts off by quoting The Economist's "Buttonwood" column (subscription may be required for that link):

[I]n America... people are speaking openly of a taxpayer bail-out to rival the rescue of America's savings-and-loan (S&L) sector in the late 1980s. The pensions insured with the PBGC showed a shortfall... the PBGC needs an infusion of $92 billion in today's dollars to meet its future obligations....

Companies and asset managers have tended to take a laid-back approach to pension underfunding.... What is worrying about the latest numbers is that we are seeing them towards the end of a period of strong economic growth and corporate profitability, neither of which is likely to continue....

Ian points out what should be the most obvious point about this:

Let's get this straight — corporate officers knowingly underfunded pension plans, obeying the letter of the law but violating its spirit. But while doing so they also did something else — they knowingly decided to take a chance on violating their contractual obligations. In fact they didn't just take a chance on it — they made decisions which would almost certainly lead to them failing to meet their contractual obligations to their retired workers.

This illustrates one of the big problems with trying to legislate economic activities beyond the basics of providing penalties for force, fraud, and deliberate malpractice. The corporate officers who made those decisions clearly were more influenced by the "letter of the law": and they are, in effect, being rewarded for paying closer attention to the legal side than the business side:

Lets take United. What would have been the consequences of them going out of business? Their planes would have been bought up, their other assets would have been bought up, and facing less competition the price of airfares might have gone up slightly, making every other carrier slightly more solvent. Yes, their workers would have lost their jobs, but compared to pensioners they are in a better position to deal with it. Furthermore, if there isn't excess capacity in the industry they stand a decent chance of being rehired and if there is excess capacity then someone's jobs were going to be lost soon enough anyway.

But the consequence of relieving United of its debt, as Hale has pointed out, is that every other carrier who hasn't reneged on their pension plan, is now under pressure to do so, because they are operating under a liability which United is not. Moreover, lets face facts — United's management are incompetent. They fucked up. Instead of being punished for it, they have been rewarded by being given another chance.

There is a huge problem with the laws, as currently configured, when bad business decisions are rewarded. Bankruptcy is supposed to provide a safe harbour for companies which have a chance to recover, not a weapon for weaker companies to pull down competitors in their industry to the extent of forcing otherwise healthy companies to also take refuge in bankruptcy.

Ian offers a suggestion, which addresses some of the current flaws, but may well make other problems more acute:

So let me make a modest proposal. Pension obligations are effectively debt — effectively money owed to retirees.

If a company goes into bankruptcy and claims they need to dump their pension commitment then perhaps the pension commitment should have higher priority than the interests of the shareholders? Perhaps if a company can't meet its debts, can't meet its obligations, then it should actually be allowed to really go bankrupt. And perhaps, when it comes time to liquidate its assets, those should go to the pension fund first, to other debt holders second, and to the current shareholders third.

Ownership of a firm includes responsibilities, even share ownership. One of those, is that in exchange for a chance for better returns, you accept that you have very little collateral when the firm goes bankrupt.